What Is ACA in Payroll and Its Requirements for Employers?

The Affordable Care Act (ACA), enacted in 2010, is a comprehensive healthcare reform law designed to expand health insurance coverage and regulate the health insurance market. Its primary goals include making affordable health insurance available to more individuals, expanding the Medicaid program, and supporting innovative healthcare delivery methods to lower overall costs. For employers, the ACA establishes specific requirements that directly influence payroll functions, particularly for larger businesses. This article will explore the ACA’s impact on employers and their payroll processes, focusing on key obligations and reporting.

Determining Applicable Large Employer Status

A foundational step for employers in understanding their ACA responsibilities involves determining if they qualify as an “Applicable Large Employer” (ALE). An employer attains ALE status if they had an average of 50 or more full-time employees, including full-time equivalent employees, during the preceding calendar year. This threshold is crucial because only ALEs are subject to the employer shared responsibility provisions of the ACA.

A full-time employee, for ACA purposes, is an individual who works at least 30 hours per week or 130 hours per month. This definition may differ from an employer’s standard definition of full-time employment. Full-time equivalent (FTE) employees are calculated by combining the hours of part-time employees. To determine FTEs, the total hours worked by all part-time employees in a month are divided by 120.

The determination of ALE status involves averaging the number of full-time and FTE employees over the 12 months of the preceding calendar year. Employers with fluctuating headcounts must carefully track these numbers throughout the year. Special aggregation rules apply to related entities, such as those with common ownership or control. Under these rules, separate companies are combined and treated as a single employer for ALE determination, meaning a group of smaller companies could collectively meet the ALE threshold even if individually they do not. If an aggregated group is an ALE, each individual company within that group, known as an ALE member, becomes subject to ACA requirements.

Understanding Key ACA Requirements for Employers

Once an employer is identified as an Applicable Large Employer (ALE), they become subject to the ACA’s employer shared responsibility provisions. These provisions outline two primary requirements. The first mandates that ALEs offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees and their dependent children. MEC refers to any health coverage that meets the individual shared responsibility requirement of the ACA.

The second requirement states that the offered coverage must be “affordable” and provide “minimum value.” A plan provides minimum value if it covers at least 60% of the total allowed costs of benefits and includes substantial coverage for physician services and inpatient hospital services. Affordability means that the employee’s share of the lowest-cost self-only coverage cannot exceed a certain percentage of their household income. For plan years beginning in 2025, this affordability threshold is 9.02%.

Since employers typically do not know an employee’s household income, the IRS provides three safe harbors for determining affordability: the Form W-2 wages safe harbor, the rate of pay safe harbor, and the Federal Poverty Line (FPL) safe harbor. The W-2 safe harbor bases affordability on the wages reported in Box 1 of an employee’s Form W-2. The rate of pay safe harbor uses an employee’s hourly rate or monthly salary at the beginning of the coverage period, assuming 130 hours worked per month for hourly employees. The FPL safe harbor ensures that the employee’s contribution for self-only coverage does not exceed the affordability percentage of the FPL for a single individual, which for 2025, translates to approximately $113.20 per month.

Accurate tracking of employee hours is crucial for ALEs to determine full-time status and ensure compliance. Many employers utilize the look-back measurement method, which allows them to track employee hours over a defined period (e.g., 3-12 months) to determine full-time status for a subsequent stability period. This method provides predictability for ongoing employees, ensuring consistent health coverage offers regardless of subsequent fluctuations in hours during the stability period. The administrative period following the measurement period allows employers up to 90 days to process data and extend coverage offers.

ACA Information Reporting

ALEs have specific information reporting obligations. These requirements involve filing forms with the IRS and furnishing statements to employees. The primary forms are Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. Form 1095-C reports detailed information about the health coverage offered to full-time employees, including codes indicating the offer of coverage and any applicable affordability safe harbor. Form 1094-C serves as a transmittal form, summarizing the information reported on all the employer’s Forms 1095-C and providing aggregate data about the employer’s compliance.

Accurate completion of these forms requires data collection and reconciliation from various internal systems, including payroll, human resources, and benefits administration. Employers must ensure the accuracy of employee personal details, offer of coverage status, and the affordability method used. If an affordability safe harbor was applied, the corresponding code must be entered on Form 1095-C.

ALEs must furnish a copy of Form 1095-C to each full-time employee by March 3, 2025, for the 2024 calendar year. Electronic filing of Forms 1094-C and 1095-C with the IRS is generally required for employers filing 10 or more information returns. The electronic filing deadline with the IRS for the 2024 calendar year is March 31, 2025.

Non-Compliance Penalties

Failure to comply with the ACA’s employer shared responsibility provisions or information reporting requirements can result in significant financial penalties for Applicable Large Employers (ALEs). There are two main types of Employer Shared Responsibility Payment (ESRP) penalties, often referred to as “A” and “B” penalties.

Penalty A, or the “no offer” penalty, is assessed when an ALE fails to offer Minimum Essential Coverage to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a premium tax credit for purchasing coverage through a Health Insurance Marketplace. For 2026, this annual penalty is $3,340 per full-time employee, excluding the first 30 full-time employees. Penalty B, or the “unaffordable/no minimum value” penalty, applies when an ALE offers MEC that is either not affordable or does not provide minimum value, and at least one full-time employee receives a premium tax credit. This annual penalty for 2026 is $5,010 per full-time employee who received a premium tax credit.

In addition to ESRPs, penalties can be imposed for failing to meet information reporting obligations. For the 2024 information furnished in 2025, the penalty for failure to file accurate and timely Forms 1094-C and 1095-C with the IRS, or to furnish accurate and timely statements to employees, is $330 per form. The maximum penalty for these failures is $3,987,000 for late or incorrect furnishing or filing. If the IRS determines there was intentional disregard for filing or furnishing correct forms, the penalty is significantly higher, at least $660 per form with no maximum limit.